As technology companies evolve, their funding needs and strategies change and they may explore middle and later stage investments from strategic partners as well as VCs. At the 2015 FOLEYTech Summit, the speakers on “The Role of VCs and Corporate Partners in Financing Company Growth” panel discussed a number of points for entrepreneurs to consider when selecting a strategic corporate partner to provide financing and negotiating.
At what point does it make sense for an entrepreneur to consider a corporate partner?
It is never too early to think about a strategic relationship with a potential partner. While synergy in operations and the investment is important, strategic fit is much more important. Entrepreneurs should consider the cultural, size and operational differences between the companies. A good strategic corporate partner will allow the companies to still act as separate entities, but will add expertise, gravitas with customers and suppliers and access to markets that can be invaluable to the smaller company just starting out.
What are the considerations for a strategic partner potentially taking a board seat?
Entrepreneurs should bear in mind that if a strategic partner takes a board seat, that partner board member may have different expectations for the company’s performance and different frames of reference for how to handle key challenges the company faces than the founder and founding board members. This can be a positive addition to the board, providing diverse perspectives and encouraging the board to consider strategic alternatives that it may not have otherwise had available, but it can also be disruptive to the board culture and put pressure on the company to act in ways it might not otherwise during key periods of its growth. In many cases, the corporate partners and founders agree that taking an actual board seat is inadvisable, and suggest instead that the corporate partner take a board observer seat in order to stay informed and provide guidance without the burden and potential conflicts presented by key board votes.
How critical are strategic partnerships, and what should entrepreneurs be willing to give in return?
Entrepreneurs should be wary of giving away too much of the company too early in order to land a key relationship with a strategic investor. The corporate partner may not follow on in subsequent financing rounds, and its presence (but failure to continue to invest) could preclude new relationships. This can be particularly concerning on an exit event if the corporate partner is the presumed suitor – warding off potential alternative suitors either because they view the company as potentially damaged goods (if the corporate partner has opted not to acquire) or a stalking horse to drive up price (if the corporate partner hasn’t yet acquired but will use its influence to acquire at a later time). One panelist advised entrepreneurs facing the prospect of giving up too much to land a key strategic relationship tube open to walking. Also, it is important throughout the course of the relationship for the entrepreneur to manage the expectations of the strategic partner and not wind up being held hostage to the strategic partner’s agenda. The company (not the partner) should drive key initiatives and key client relationships, as it can be problematic for the company’s operations and survival prospects if the strategic relationship goes sour.
How should entrepreneurs handle the loss of a key champion in a partner?
The loss of a key champion at a corporate partner is a transition like any other. However, losing the champion from a VC partner can be more traumatic to the relationship given the smaller teams involved in VC firms. It is important to never rely on any one person as the most important person to the relationship, as they may not always be there.
Overall, there is optimism that key VC and corporate partner relationships can help further the growth plans for entrepreneurs – so long as the relationship is established on fair terms, expectations are managed throughout and the exit is handled in such a way as to benefit both the company and the partner.